Compared to the explosive performance of US tech stocks, UK shares have underperformed over the last decade. But that doesn’t mean there aren’t any lucrative opportunities on the London Stock Exchange.
While America has a vast collection of growth stocks, Britain is home to some of the biggest dividend-generating companies on the planet. For reference, the S&P 500 currently has 17 companies offering a yield of 5%, or more. By comparison, the FTSE 350 has 111!
That’s why, for income investors, UK shares are the perfect hunting ground. Even more so in 2023, with many valuations trading at a significant discount.
Volatility breeds opportunity
Having nearly a third of Britain’s largest companies offering a payout higher than the 4% average is unusual. As previously mentioned, the ongoing market instability has dragged stock prices down, enabling yields to rise. And while seeing a portfolio tumble can be wildly frustrating, it provides potentially lucrative entry points for new capital.
Volatility is a natural part of an investment journey. However, while it might not seem like it now, the current environment is a pretty rare occurrence. In fact, it’s been over a decade since the stock market has endured such a severe downward correction, dating back as far as the 2008 Financial Crisis.
Such an opportunity will undoubtedly emerge again. After crashes, corrections eventually re-emerge. However, when that’s going to happen is anyone’s best guess. We’re not out of the woods yet. But once investor pessimism subsides in the current climate, we might be on track to enjoy another (hopefully) decade-long bull market.
Investing in 2023
Buying top-notch UK shares when others are selling is a proven recipe for building wealth. And it’s a simple strategy that some of the wealthiest investors today have used to build their fortunes.
Finding such buying opportunities during periods of volatility is far easier thanks to emotionally driven decision-making from panicking investors. However, just because a stock looks cheap today doesn’t mean it won’t get even cheaper.
Deploying a pound-cost-averaging strategy is a sound tactic to account for this possibility. Instead of throwing all available capital into UK shares in one go, investors can instead drip-feed it into the markets over the course of several weeks, or months.
That way, should a high-quality business see its valuation get slashed once again by short-term panic, long-term investors have the money at hand to snap up more shares at an even better price.
However, it’s important to not get lured into any value traps. Sometimes, rapid sell-offs of seemingly strong companies may be warranted. Perhaps a competitor is taking chunks out of the firm’s market share. Or perhaps a new technology is beginning to emerge that could disrupt an entire sector.
Accounting for these risk factors is paramount for success. And that’s why, before capitalising on any seemingly terrific buying opportunities, it’s critical to investigate why a stock has taken a turn for the worse. Should a fundamental problem be revealed, then it’s likely worthwhile steering clear.
